‘A proxy for holding Bitcoin’: Crypto firms set to go public as market hits US$3 trillion

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The cryptocurrency market’s total value passed a milestone US$3 trillion on Monday fuelled by gains in the prices of bitcoin and Ether, but it isn’t just the currencies themselves that are seeing an inflow of investor interest.

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Since the pandemic bull market emerged, demand for publicly traded companies that participate in the crypto ecosystem have surged, too, with a number of firms such as Coinbase and Voyager Digital listing on public markets. Last week, Toronto-based crypto trading platform CoinSmart became the latest to go public, listing on the NEO Exchange, where its shares jumped by 24 per cent on their first day of trading.

Joseph Vafi, managing director of equity research at Canaccord Genuity LLC, expects to see a boom in Canadian and U.S. crypto companies filing to go public as investors look for exposure to the sector.

“One of the reasons U.S. investors are very interested in these companies is that they may believe in crypto … but it’s very hard to own Bitcoin directly still because it’s not an approved investment vehicle,” Vafi told the Financial Post. “People are buying stocks, like Hut 8 and miners, because they’re a proxy for holding Bitcoin.”

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Vafi added that Canada is seeing the same enthusiasm for crypto stocks. When analyzing these companies, Vafi takes different approaches and qualities based on what part of the crypto space they operate in. Miners tend to have fixed costs and their performance tracks the price of bitcoin, not unlike how a gold miner would make more profit on the rising value of gold, Vafi said. Another element buoying mining stocks is the exodus of bitcoin miners out of China and into other markets, such as the U.S., Kazakhstan, Russia and Canada.

When it comes to crypto exchanges and brokerages, Vafi focuses on the enterprise-value-to-sales ratio or enterprise-value-to-EBIT, particularly with companies such as Coinbase which have a more mature profitability level. Vafi said this is due to the fast growth rates in brokerages and exchanges, which provides comparability to other tech segments, such as software as a service (Saas) tech and Internet.

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While the market has expanded rapidly Vafi believes there’s still a lot of runway.

“I think it’s going to expand pretty quickly…. I think you’re going to continue to see more people own the assets through exchanges … institutions are rapidly becoming more involved here,” Vafi said. “(The market is) really just expanding kind of as fast as one could possibly imagine while not expanding so fast that it just tears apart in mid-flight because it’s going so fast.”

In Canada, pioneering companies such Quebec-based mining company Bitfarms and Alberta’s Hut 8 Mining first listed on the Toronto Stock Exchange in 2019. Hut 8, which began trading on the TSX Venture Exchange in March 2018 and on the TSX in October 2019, went through a TSX Sandbox program. Hut 8 also listed on the Nasdaq in June and has seen its shares jump more than 50 per cent over the past month.

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The TSX Sandbox program, launched in April 2019, aimed to bring in applicants that may not yet meet all of the exchange’s listing requirements, though could win acceptance if they meet other conditions through the program. In Hut 8’s case, it graduated from the program in October 2020 after filing a prospectus and had no compliance issues for 12 months. New York-based Galaxy Digital Holdings Ltd. is another crypto alumni of the program.

In general, the TSX classifies crypto companies under the technology category, which has requirements such as having a minimum of $10 million in the treasury, holding adequate funding to cover planned capital expenditures and having advanced-stage products.

If this was easy, everybody would be doing it

Justin Hartzman

Despite the growth of publicly traded crypto companies, Vafi does not anticipate much consolidation, particularly not big-ticket mergers among the larger players such as Coinbase.

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It is not a view shared by all who watch the space. Kevin Dede, managing director of equity research at H.C. Wainwright, says we’ll know more when the next downturn hits the industry.

“If you remember the last bitcoin down cycle … there was some consolidation on the mining front,” Dede said. “I remember talking to a lot of companies, and now many of them aren’t here.”

According to Justin Hartzman, co-founder and chief executive officer of CoinSmart, more public crypto companies could open the window for consolidation down the road.

“The reality is that there’s going to probably be much consolidation in the market,” Hartzman said. “Consolidation sometimes becomes easier when companies are public. So, we’ll see how that pans out across the board.”

While Hartzman said filing to go public as a crypto company is not unlike filing in other industries, certain details such as the regulatory scrutiny, set it apart.

“If this was easy, everybody would be doing it,” he said.

• Email: shughes@postmedia.com | Twitter: StephHughes95